Debt dos and don’ts

Debt we like

Good debt helps you buy an asset that is likely to rise in value or generate an income for you in the future. Good debt can include:

A home loan, as the value of your property is likely to rise over time.

Borrowing money to start a business, since it enables you to earn more later while building a valuable asset for the long term.

Borrowing to invest, especially if the loan interest and other borrowing expenses are tax deductible.

Of course, not every business or investment is successful. To come out ahead, you need to earn an after-tax return greater than your after-tax borrowing costs over the life of your loan. So do your sums before you invest, and consider the tax implications of your investment decisions carefully.

Do:

Have adequate insurance. Make sure your home and other assets are properly covered, and consider income protection to insure your ability to earn a living.

Make extra repayments if you can. A few extra repayments early on can save years on your loan and thousands of dollars in interest. Also consider making payments more frequently – perhaps weekly instead of monthly. You’ll end up paying off your loan faster, without a noticeable impact on your day-to-day finances.

Don’t:

Overextend yourself. Never take out more debt than you can handle – even if interest rates rise significantly.

Borrow to invest without doing your homework. Calculate the costs and returns before you commit.

Debt to avoid

Going into debt to buy things you can’t sell or that will lose value over time is not a good move. Putting a holiday on plastic is never a good idea: once the holiday’s over, you have nothing left but the memories – and a monthly credit card bill.

Another common mistake is to borrow for a depreciating asset like a luxury car. Cars tend to lose value rapidly, leaving you with a loan to repay and an asset now worth a fraction of its original selling price.

Do:

Pay your credit cards off promptly. By paying them off before the end of the interest-free period, you get the convenience of a card without paying a financial penalty.

Consolidate non-investment debts. Pay off more expensive debts, such as credit cards, from a single, low-cost loan – using the redraw facility on your home loan, for example.

Don’t:

Tie up your spare cash paying off debts. By keeping cash on hand (perhaps in a housing loan offset account), you can stay prepared for emergencies and avoid getting into debt unnecessarily.

Bury your head in the sand. If your debt is getting out of control, talk to a financial adviser or debt counsellor. They can help you make a payment arrangement with your creditors and get you back on track.

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We can help make debt work for you, not against you. We can also show you how to manage your cash to pay off your debts and build wealth faster, without sacrificing your lifestyle today.